Are the Fed’s Blindfolds and Earplugs Finally Coming Off?
“Too little, too late” may be the end result of policy that’s hawkish in name only.
Here we go again. Never thought we’d get tired of being right (actually being sincere here).
The claims of transitory inflation have aged like fine milk, and the latest rate hike was accompanied by FOMC statements that claimed ferocity while hiding fangs made of taffy.
There was even a statement about a "growth recession" — a near-certainty we mentioned back in August — which is becoming increasingly likely.
Meanwhile, there remains much hand-wringing about the future and the purported soft landing, while the writing on the wall foretells our impending doom in large, bloody script.
Job growth has remained robust, but this should hardly be a cause for celebration: unemployment is at 3.7%, but is below what the Fed considers sustainable in the long term.
So unsustainable, in fact, that of the eight recessions the US has experienced since 1960, six of them (75% of them) have followed periods where the U3 rate dipped below 5%.
And since the end of World War II, almost 80% of every period of Fed tightening has been followed by a recession within two years.
The odds of a soft landing, as seen in this graphic, quite simply, are not in our favor.
The fact that the markets considered this latest hike a sign that the Fed have become as hawkish as they’re going to get begs the question of just how disconnected some investors are from reality.
The belief that markets will somehow recover despite little change in the economic fundamentals recalls the dot-com days, when the NASDAQ had nearly a dozen bull runs on its merry way to falling 70%.
To Powell’s credit, the warnings of continuing pain are valid and warranted, although perhaps stronger policy is needed than the continued 75 bps hikes: after all, inflation can become entrenched simply based on perception (a phenomenon we’re already seeing), and investor sentiments claiming that we are near the end of the tightening period are turning Powell into Aesop's Fables', "The Boy Who Cried Wolf," and we all recall how that story ends.
President Biden, to his credit, has publicly called inflation the "bane of our existence," but unfortunately the economy does not seem to be heeding his platitudes.
The rail worker settlement — on track to show the country just how expensive being "the most pro-union president you’ve ever seen" is actually going to be — only managed to throw a threadbare Persian rug over a rotting cesspool, failing to resolve the fundamental causes of the impending strike and kicking the can down the road until such a time as it can undermine the economy at the worst possible moment.
Spending by the Executive Branch has reached nearly criminal levels, cementing our ultimate doom on a foundation of short-term popularity and injective capital into an already-overheated economy.
The surge in our national debt has increased by $4.8 trillion — to its highest level ever — and at a faster rate than either the dot-com implosion or the Great Recession.
The administration cannot buy popularity with spending (as seen in this graph) to get us out of this inflationary crisis any more than the Fed can resolve it by letting interest rates slowly crawl toward an uncertain future. Inflation is becoming entrenched, it is becoming demand-driven, and it’s threatening to become permanent.
The painful truth is that the Fed was late to recognize inflation, they were late to start rate hikes, and now they’re late to get rates to where they need to be to stem inflation.
This perpetual lateness does little to stabilize prices and even less to get inflation under control. Powell’s channeling of his inner Volcker will earn him few friends, but unfortunately the responsibilities of the Fed Chair far outweigh the need for admiration.
Inflation is also not a uniquely American problem (although we are thankfully nowhere near Argentina’s nearly-80% August inflation rate): as the most powerful and influential economy in the world, we have a fiduciary and ethical duty to resolve this issue as quickly as possible.
If the recent rate hikes are evidence of Powell’s hawkishness, his definition of dovishness must be terrifying.
The promised pain must come now, as — much like lancing a boil — the more it’s put off the more painful the process will become.
Missing a soft landing at this point is virtually guaranteed.
It’s time to stop putting off the inevitable: the longer inflation takes to run its course, the deeper the recession on the other side of the cliff is going to be.
The alternative is to watch the next decade be remembered as the second "roaring twenties" for all the wrong reasons.
Vinh Vuong is the Chairman and CEO and Willie Costa is COO of Garrison Fathom, a diversified holding company with a focus on long-term holdings and shareholder activism.
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